Question

You have just started an internship with Frode Laursen and you have spent your first day together with a Key Account Manager (KAM), who handles transactions with three different customer segments (A, B and C).

He proudly tells you that his focus is on serving the A customers since they yield the highest contribution margin per transaction. Then come the B customers, and if there is time left, he also serves the C customers.

Upfront, his argument sounds logical, but from your studies, you recall that there might be other aspects to consider. You take on the task of collecting data for a typical workday for a KAM.

The Key Account Manager has a daily practical capacity of seven working hours.

Data of the customer segments have been collected, and are included in the table below:

	Revenue per transaction	Costs per transaction	Time per transaction in hours	Demand per day (transactions)
Segment A	1,000	500	0.75	5
Segment B	700	400	0.25	14
Segment C	400	200	0.20	10

On an average workday, the Key Account Manager makes 5 transactions with the A customers, 13 with the B customers and 0 with the C customers.

The daily contribution margin is displayed in the table below:

	Segment A	Segment B	Segment C	Total
Revenue	5,000	9,100	0	14,100
Variable costs	2,500	5,200	0	7,700
Contribution margin	2,500	3,900	0	6,400

1. Calculate and suggest a more optimal allocation of transactions with the customers from a pure Management Accounting point of view and calculate the contribution margin based on your suggestion.

2. Discuss briefly if there are other considerations you would include in your suggestion.

Answer 1

Part A)

KAM Practical capacity = 7hours

Required resources = Demand* time per transaction = (5*0.75)+(14*0.25)+(10*0.2) = 3.75+3.5+2 = 9.25hours

Since required resource is more than available resources, KAM practical capacity is considered as limited resources or bottleneck activity. Hence which customers gives more contribution per KAM hour is priortised.

Sl.No	Particulars	Segment A	Segment B	Segment C	Total
i	Transactions per day (given)	5	14	10
ii	Revenue per transaction (given)	1,000	700	400	2,100
iii	Costs per transaction (given)	500	400	200	1,100
iv	Contribution per transaction (ii-iii)	500	300	200	1,000
v	Time required per transaction (given)	0.75	0.25	0.2	1.2
vi	Contribution per working hour (iv/v)	666.67	1,200	1000
vii	Ranking based on vi	III	I	II
viii	Allocation of hours based on ranking	7-3.5-2 = 1.5	(i*v) = 3.5	(i*v) = 2
ix	Possible number of transactions (viii/v)	2	14	10
x	Revenue (ii*ix)	2,000	9,800	4,000	15,800
xi	Variable cost (iii*ix)	1,000	5,600	2,000	8,600
xii	Contribution margin (iv*ix)	1,000	4,200	2,000	7,200

Part B)

Time devotted to customer A per transaction is thrice time devotted to customer B. Hence working hours for customer A should be reduced to earn more contribution.

At the same time while reducing time, quality should not be compromised.